TRUE-FALSE QUESTIONS

1. Litigation costs are the largest single cost faced by audit firms.

2. The expectations gap includes a misperception by shareholders that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

3. The three laws from which auditor liability is derived include common law, contract law, and statutory law.

4. Negligence occurs when a person fails to perform a contractual duty.

5. Examples of breach of contract include violating client confidentiality, failing to provide the audit report on time, and failing to discover material error or employee fraud.

6. To win a claim against the auditor, third parties suing under common law must generally prove that they suffered a loss, that the loss was due to lack of reliance on misleading financial statements, and that the auditor knowingly participated in the financial misrepresentation.

7. Professional judgment involves applying relevant professional knowledge and experience to unique and potentially uncertain facts and circumstances in order to reach a conclusion or make a decision.

8. An auditor who is professionally skeptical will reasonably question the honesty and integrity of management.

9. Utilitarian theory holds that what is ethical is the action that achieves the greatest good for the least number of people.

10. In rights theory, the highest order rights are those granted by the government, such as civil rights, legal rights, rights to own property, and license privileges.

11. The AICPA's principles of professional conduct articulate auditors' responsibilities and their requirements to act in the public interest, to act with integrity and objectivity, to be independent, to exercise due care, and to perform an appropriate scope of services.

12. An auditor's independence would be considered to be impaired if his or her immediate family member were employed by the audit client in any capacity or personnel level.